When does a click constitute an endorsement?

Let’s face it. I sometimes act like a guy who needs to be dragged into the 21st century. While that may be true, I’m hoping it is genuine compliance concerns that are making me very cautious about the use of Facebook and other forms of social media used by Registered Investment Advisers (“RIAs”).

Applying an old advertising rule to new technology

During an examination of an RIA’s use of social media for marketing purposes, regulators will be applying Rule 206(4)-1 under the Investment Advisers Act of 1940, or similar state rules, to technology that changes each day. Advertising rules and regulations prohibit the use of testimonials, as well as any content that is false or misleading in any way.

Thumbs-up or thumbs-down on the Like button

Facebook issues are more difficult to resolve. One issue is whether clicking the “Like” button on an RIA’s Facebook page will be construed by regulators as a testimonial. In April 2010, Facebook changed its terminology from “Become a Fan” to “Like.”

In a discussion of this issue, one attorney at NCS argued that the individual was giving the Facebook page a thumbs-up, not the advisory firm. It remains to be seen if regulators will make that distinction. The SEC or a state regulator may decide that you can’t engage in any activities on Facebook that would not be permitted in a traditional advertisement. The problem, however, is that traditional advertisements, such as those found in newspapers and magazines, won’t necessarily reach a growing portion of the population. To reach younger prospective clients, RIAs will need to rely on social media.

Even if regulators accept that “Like” isn’t a testimonial, there will undoubtedly be content restrictions imposed on the use of social media when the SEC provides guidance on this topic. The SEC recently conducted a sweep exam to determine how RIAs are using social media, which is usually a prelude to words of wisdom from the Commission.

FINRA published excellent guidance for using social media, but that regulatory notice is more valuable to registered reps than RIAs and Investment Adviser Representatives (“IARs”). (http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120779.pdf) That regulatory notice does not address whether terminology such as “Like” constitutes a testimonial. This issue won’t necessarily apply to broker-dealers, because they are permitted to use testimonials if they are accompanied by specific disclosures.

Conservative versus aggressive choices

Essentially, there are two options for RIAs. One is to be very conservative, which I tend to be, and not use Facebook at all. A riskier approach is to move forward but to make a good faith effort to stay true to the intent of the advertising rule. This means enacting policies and procedures to make certain that the RIA is limiting the risks to investors arising from the use of Facebook. While you may not believe there is a risk, the SEC may decide that social media poses a threat to prospective clients and investors.

Although disclosures are almost never the remedy for an RIA advertisement containing a testimonial, it might help in situations where questions exist as to whether a particular word or phrase falls in that category. For what it’s worth, here is language that a firm might build upon:

Clicking the Like button does not constitute a testimonial for or endorsement of our advisory firm, any associated person, or our services. Clicking the Like button is merely a mechanism to circulate our Facebook page. “Like” is not meant in the traditional sense. In addition, postings must refrain from recommending us or providing testimonials for our firm. Because the SEC and state securities laws prohibit testimonials, any such postings are subject to swift removal.

Depending upon the content of the Facebook page, a number of other disclosures may be necessary.

Aside from adding robust disclosures, an RIA’s Facebook page must avoid marketing hype, specific recommendations, and language that might be construed as a guarantee. RIAs must also make certain that Investment Adviser Representatives aren’t using their personal Facebook page to market the firm’s advisory services.

Ultimately, regulators may use a facts and circumstances test to determine if an RIA’s Facebook page violates advertising rules. Rather than just looking at the Like button, regulators will weigh whether an RIA is using Facebook and other forms of social media in a misleading manner. If so, regulators aren’t going to like you.

Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.

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